WTI $19.78 +94c, Brent $26.44 -4c, Diff -$6.66 -98c, NG $1.89 -6c
Last week ended with decent gains as investors took on board a number of facts not least the change in month that brought with it serious production cutbacks from Opec+. Now they are equally not so dim that they expect a magic wand to have the combined effect of immediately reversing the demand slump and also the huge stock-build that is still being added to.
But investors are smart enough to know that the beginnings of a recovery are not always obvious and that world economies coming out of recession will still drive cars and trucks and in due course fly as well. (The Sage of Omaha selling his airline stocks at recent lows comes to mind, after all he has under-performed the S&P over 5, 10 and 15 years…)
Combine the billions of dollars taken out of capex with the fall in US production and, yes the market will tighten, not yet but it will happen. The combined wisdom of the market re the domestic fall in US production is now way past my old top of the range forecasts, what was a fall of 1m b/d this year and again next has already almost happened and if it stayed at only 2m b/d this year it would be a miracle. Finally the Baker Hughes rig count showed a fall overall of 57 units last week to 408, in oil it was down 53 to 325…
Diversified Gas & Oil
A trading update for the 1st quarter from DGO who have most certainly delivered the goods again with their unique business model showing that they can produce returns from the most tricky of markets, the shares are nearly 70% up from the low on 16th March.
Net daily production was maintained at 94.0 MBoepd while the company remains ‘navigating’ the COVID-19 pandemic. A ∼0% net decline during the period from the company’s legacy, largely conventional assets that extends the effectiveness of DGO’s Smarter Well Management System programme to over 18 months, with well optimisation techniques continuing to offset natural production declines gives total net production within 1% of the 2019 exit rate of 94.8 MBoepd.
A prospectus is due on the 13th of May to transition DGO to the Official List and for the shares to start trading on the Main Market on 18th May. 1Q 20 Adjusted EBITDA of ~$78 million hedged (57% margin), unchanged from 4Q 19 of $78 million (55% margin), supported by an average 1Q 20 natural gas hedge price of $2.73/MMBtu. Accordingly, stable production, combined with an efficient, low-cost structure led to 1Q unhedged margins of 41% despite a 22% decline in the Henry Hub NYMEX price Q/Q.
There was also another trademark attack on expenses, 1Q total unit cash expenses were $6.98/Boe which is down a meaningful 22% v 1Q 2019 ($8.9/Boe) and also down on 4Q 2019. The maintained quarterly dividend payments, supported by an expanded hedge portfolio with ∼90% of 2020 and 2021 production hedged at $2.73/MMBtu and $2.59 respectively giving plenty of room for confidence.
So, a sound hedging policy, operational excellence and disciplined management has led to a comprehensive and sustained policy of maintaining dividends on the back of strong cash flow despite periods of low commodity prices. DGO shares are nearly 70% off the low in March but as the 1st quarter has showed, the bounce is no fluke, indeed seeing how the model is working in current conditions makes me even more confident about DGO and with its massive yield gives commendable defensive attributes into the bargain.
Friday saw Rose Petroleum issue an operations and strategy update where the board announced steps taken to conserve existing cash balances, safeguard the existing asset base and ‘position the company for growth via value-oriented acquisition opportunities’.
So far they have negotiated an extension to the proposed acquisition of a WI in the McCoy lease in Colorado until 31 December 2020 giving the company time to assess market conditions for the deal, as well as continuing the development of proprietary technological tools developed to increase valuation accuracy as related to potential acquisitions. Understandably for a management such as that at Rose it is not a surprise to see them ‘in active discussions with industry and financial partners regarding deal flow and funding options’.
They are also continuing the ongoing partnership with the US DOE on a Government-funded study to, amongst other things, increase the wider visibility of the area which contains the Rose acreage in the Paradox Basin, Utah. While all this has been going on Rose management has been implementing ‘a further cost reduction programme, in addition to that already made and specifically reductions to the cash compensation of all the company’s directors and executive team’. Finally the board announces that it intends to change the name of the company to Zephyr Energy at its 2020 AGM.
I have been very impressed with the new team assembled at Rose at both executive and NED levels and I am convinced that they will make success of their stated plan of action. As CEO Colin Harrington states in this announcement ‘Rose is now positioned as a clean, low overhead, unlevered and value-focused vehicle from which to build’. He continues to remind us that ‘the team has a long track record of involvement in successful acquisitions and we are in active pursuit of opportunities that have arisen’. Shareholders who have been in Rose for some time should be delighted that such a strong team with excellent track records have alighted on their company, they are being joined by investors who know what might happen here, its saying ‘remember my name, it’s Zephyr and I’m here to stay’….
I had the opportunity to chat to Tom Kelly this morning, there is plenty going on at Empyrean and of course Coro shareholders also have an interest in the Mako gas field. With regard to the most important event coming up, the updated CPR from GCA, much has been going on in the background.
With the COVID virus around it was thought that the access by GCA technicians might be difficult or denied but fortunately the operator Conrad has been able to present all the required data to them and accordingly the CPR should be available before long. With some sounding doubts about gas prices in the Far East, Tom was at pains to remind me that pipeline quality methane has a premium to LNG which is encouraging for EME.
I have always been big fan of the company’s acreage in China and while it might be fair to say that the oil price needs some recovery to press the go button it is still looking very exciting. For the seismic inversion work the Company has engaged China Offshore Services Limited to assist with technical work and data processing and which is expected to better define the reservoir rocks at the Company’s two primary prospects, Jade and Topaz.
The technical work and data processing is now complete and the Company is in the process of analysing the resultant data and anticipates being in a position to update shareholders on the results of this work in the next few weeks. As I see it the options vary between carbonate or sandstone or even a mix, all three of which would be acceptable if not better. Finally there have been some murmurings about whether EME will be able to drill a well by the date required of June 2021, even if the Force Majeure clause might be enacted or not. As I see it, EME will not want to create uncertainty nor upset CNOOC and they should be able to drill either prospect dependent on appropriate agreements in due course.
Shareholders are being offered an Open Offer at the moment at 3.5p per share, this equates to an opportunity to follow-in major shareholders and directors at the same price and they would be wise to consider joining them. With Tom Kelly having invested at 9.5p a little while ago and 3.5p lately it is fair to say that his interests are aligned with shareholders. I rate Tom and his team very highly and shareholders will get a number of opportunities over the next few weeks and months to create value in both Indonesia and China.
Andrew Pancholi Webinar Presentation
I would like to re-introduce you to a long standing friend – Andrew Pancholi who has featured in the blog before.
Andrew is a world-renowned trading expert specializing in market timing. A master trader with over 30 years experience in navigating the financial markets, he is the creator of the highly acclaimed ‘Market Timing Report’
Andrew’s predictive work is now recognised globally and he is one of the world’s foremost experts in cycle prediction. So much so that he advises Funds, Institutions, Government bodies and the military. He advises on equity markets and is also highly recommended by commodity traders where he has had spectacular success in the oil and gold markets.
This is a chance to see some of Andrew’s work and he has created a special 1 hour presentation on Cycles Analysis showing all of the work he does. His most recent success was calling the 2020 crash using a 90 year cycle and the February edition of The Market Timing Report gave to the exact day the top of the S&P500.
I hope that you enjoy the opportunity to see his work and please tell me how you find it.